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In this lesson, I will talk about the different ways how you can trade forex during key economic news events.
Most common used news strategies:
- Trading the Numbers
- Straddle the News
- Hedging the News
Trading the Numbers
Traders want to take advantage of the discrepancy between the forecasted and the actual key economic number when trading the numbers. As mentioned before, you need a very fast news data feed such as Reuters or Bloomberg because you want to get in the trade before the spike begins.
Steps to trade the numbers:
1. Purchase a fast news datafeed at Reuters or Bloomberg
2. Track the news consensus and determine the significance of the economic news report being released, if it is not important, do not trade it.
You will be able to find all important data on a good data calendar
3. For each important news release you need to know how large a discrepancy has to be in order for you to act on the trade.
4. Finally, watch the news release using your fast datafeed and trade the numbers.
Example:
UK CPI News Release
"There are three different numbers. There is the month over month CPI, there is the year over year CPI, and there is the core CPI. The most important number that most traders and economists will be focusing on is the CPI headline year over year number, which is expected at around 2.8%, same as it was last month.
If for some reason the number comes out at 3.1% or higher, it would set a new high in many years, and a possibility of a rate hike out of UK will probably be considered imminent, so GBP/USD may possibly go up by 80 pips or more in the first hour of the report.
If the CPI reads at 2.4% or lower, it would be a huge drop, and most would probably assume that the Bank of England will have to think twice before hiking the rate anytime soon, so GBP/USD may possibly go down by 80 pips or more in the first hour."
Possible scenarios:
If the consensus and the actual number is inline with the market expectations, you would not trade.
If the actual number is at 3.1% or higher, you would go long.
If the actual number is at 2.4% or lower, you would go short.
Below picture shows what happened that day. The number came out much better than expected and the GBP/USD spiked up.
GBP/USD CPI news release spike
Things to consider when interested in "Trading the Numbers":
1. You have only 0.5 - 2 seconds in which to act before the spike begins. Not fast enough? No money for you.
2. You really need to know how to read and interpret the numbers. Wrong interpretation will cost you money!
3. A fast news service is very expensive and is not recommended when you trade a small account because it's very unlikely to cover your data feed expenses.
Straddle the News
This strategy is very simple and consists of 2 limit orders, one to buy a few pips above the range high and one to sell a few pips below the range low, then wait for the price to breakout triggering one of your orders. Your stop loss order should be placed a few pips below the range low when buying, conversely, a stop loss order should be placed a few pips above the range high when selling.
An example: (See picture below):
Range high: 1.9938
Range low: 1.9919
Place an order to buy at 1.9941 with a stop loss order at 1.9917. Take profit at 1.9991.
Place an order to sell at 1.9916 with a stop loss order at 1.9940. Take profit at 1.9866.
That's it!
GBP/USD CPI news straddle strategy
Things to consider when interested in "Straddle the News" forex strategy:
1. False breakouts or whipsaws can occur, especially when the release came close or in line with market expectations and traders fade the breakout (i.e place trades in the direction opposite to the initial price movement). Worst case scenario, both stop losses get hit. Although the strategy relies on "true" breakouts it can still work during a false breakout if you take the profits quickly and don't get greedy plus you put very tight stops below or above the range to minimize the risk.
2. During key news releases, spreads can widen up and both buy and sell orders can be triggered at the same time. You will end up losing.
3. Slippage - During major fundamental announcements, both stop loss and limit orders may not be guaranteed to be filled at your price. 'Slippage' is the cost involved when currency traders enter the market at a price worse than the level they wanted to get into.
For example, a trader wants to sell GBP/USD at 1.9000 but the order is executed at 1.8999 rate. That 1 pip difference is slippage cost.
Hedging the News
What is hedging? Hedging enables a currency trader to simultaneously hold Buy and Sell positions in the same currency pair at the same time in one trading account.
Hedging News Strategy:
1. To hedge, go both long and short at market price 30 min before the news release.
2. Add a protective stop loss order to both long and short positions 30 seconds before the news release.
3. Add a limit order to both long and short positions 30 seconds before the news release.
Now wait...
Possible scenarios after the news release :
Whipsaw or false breakout - both stop losses can get hit.
No movement - nothing will happen to your open positions.
Price breaks out - one of your stop loss orders will get hit and hopefully, you will reach your target level on the remaining open position. |
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